Is the Silicon Valley Bubble Set to Burst?
There’s a lot of luck involved when playing with market bubbles. Get in and out while they’re still growing and you stand to win big, but hang around too long and you risk watching your assets fall apart in front of your eyes as the metaphorical monolith comes crashing down.
Like all bubbles in history, countless speculators are watching Silicon Valley’s rise with increasing anxiety. The question on everyone’s lips is the same: Is California’s technology dream set to burst? Based on current projections, there are a number of signs suggesting that doomsday is already on the horizon.
The brakes have been slammed in the IPO market as, according to Renaissance Capital, 60% of IPOs that went public last year are now trading below their IPO price. Average returns are slightly down and the number of deals has fallen significantly.Simultaneously as this market slows down, so too can we expect start-up investors to become less extravagant with their generosity seeing as, according to CB Insights, over half of
Simultaneously as this market slows down, so too can we expect start-up investors to become less extravagant with their generosity seeing as, according to CB Insights, over half of investments during the first three-quarters of 2015 came through acquisitions or IPOs.
For many companies, such restraint has been a long time coming. There are already too many grossly over-valued companies in the market that have been driven to stratospheric evaluations through speculation, rather than actual revenue growth. As they start facing up to reality and tightening their belts, this is a sign that investors are becoming less willing to bet on fantasies, or “unicorns”, to use industry jargon.
All this may sound terrifying to veterans of the dot com bubble, especially those who can still feel the burn marks from its collapse. But as tempting as it is to draw parallels with history, there are noticeable differences between both eras.
For starters, there are stricter standards nowadays for going public, which themselves may have made entrepreneurs relatively more IPO risk-averse. These legal changes have also resulted in people being more likely to keep an eye on private company valuations, providing a far greater degree of transparency in the age of unicorns, pentacorns and decacorns.
As well as that, you don’t need to be Bill Gates to start up a tech company these days. Cloud services and other revenue-saving technologies have made entering the market cheaper than ever before, which has naturally increased competition. However, the amount of diversity in the industry seems to have shrunk in some cases: For instance, there are highly visible IPOs in fewer categories than during the late 1990s and early 2000s.
Finally, there’s a lot less debt knocking around than there was two decades ago. Back then, billions had to be borrowed by broadband service providers to put in place the necessary infrastructure that we already have nowadays. In contrast, the relatively asset-light nature of modern tech companies means that, although investment is often necessary, you don’t need to wrap a financial noose around your neck when securing it.
So be cautious, for this bubble’s end is nigh, at least until the next one starts expanding soon afterwards. But equally don’t start building a nuclear bunker just yet, as the fallout is likely to be far less severe than that experienced by the dot com boom years ago.